What do overabsorbed and underabsorbed mean?

In cost accounting, manufacturing overhead costs are often assigned to products by using a predetermined overhead rate. The predetermined rate is likely based on an annual manufacturing overhead budget divided by some activity such as the expected number of machine hours. Instead of saying that the manufacturing overhead is assigned, we might say it is allocated, applied or apportioned to the products manufactured during the period. We could also say that the products have absorbed the overhead.

If the amount of overhead assigned to the products manufactured is greater than the amount of overhead actually incurred, the products have overabsorbedthe overhead costs. If the amount of overhead assigned to the products is less than the amount of overhead actually incurred, the products have underabsorbed the overhead costs.

The cause of the overabsorption or underabsorption will be some combination of 1) the quantity of products manufactured, and 2) the actual overhead costs incurred.